nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒09‒02
twelve papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Optimal Capital Income Taxation By Andrew B. Abel
  2. Salience and Taxation: Theory and Evidence By Raj Chetty; Adam Looney; Kory Kroft
  3. "Local VAT in Japan: sustainable foundation for future"(in Japanese) By Nobuki Mochida
  4. "Measuring Fiscal Needs: Japan's Experiences" By Nobuki Mochida
  5. To Segregate or to Integrate: Education Politics and Democracy By David de la Croix; Matthias Doepke
  6. As SIMPL As That: Introducing a Tax-Benefit Microsimulation Model for Poland By Olivier Bargain; Leszek Morawski; Michal Myck; Mieczyslaw Socha
  7. Does anticipation of government spending matter? Evidence from an expectation augmented VAR By Tenhofen, Jörn; Wolff, Guntram B.
  8. Structural Breaks in Public Infrastructure Investment in the U.S. By Alfredo M. Pereira; Martin B. Schmidt
  9. Lemons are Green: The Informative Role of a Pigovian Tax By MAHENC Philippe; ;
  10. Determinants of Interest Group Formation By Bonnie Wilson; Dennis Coates; Jac Heckelman
  11. Why Have Tax Reforms Hampered MDG Financing? By Terry McKinley
  12. Contracting for Government Services: Theory and Evidence from U.S. Cities By Jonathan Levin; Steven Tadelis

  1. By: Andrew B. Abel
    Abstract: In an economy with identical infinitely-lived households that obtain utility from leisure as well as consumption, Chamley (1986) and Judd (1985) have shown that the optimal tax system to pay for an exogenous stream of government purchases involves a zero tax rate on capital in the long run, with tax revenue collected by a distortionary tax on labor income. Extending the results of Hall and Jorgenson (1971) to general equilibrium, I show that if purchasers of capital are permitted to deduct capital expenditures from taxable capital income, then a constant tax rate on capital income is non-distortionary. Importantly, even though this specification of the capital income tax imposes a zero effective tax rate on capital, the capital income tax can collect substantial revenue. Provided that government purchases do not exceed gross capital income less gross investment, the optimal tax system will consist of a positive tax rate on capital income and a zero tax rate on labor income--just the opposite of the results of Chamley and Judd.
    JEL: E62 H21
    Date: 2007–08
  2. By: Raj Chetty; Adam Looney; Kory Kroft
    Abstract: A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and nearby control stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption significantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience affects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.
    JEL: D11 H0 J0 K34
    Date: 2007–08
  3. By: Nobuki Mochida (Faculty of Economics, University of Tokyo)
    Abstract: Local VAT had been introduced in Japan in FY1997. Several problems became evident with the current system. The purpose of this paper is to identify these problems in detail and to suggest reform options in the light of international experience and the fiscal federalism literatures. We argue that contrary to traditional wisdom, it is possible to allow local governments to set their rate of VAT independently, within the framework of revenue-sharing arrangement on the basis of consumption statistics. To do so, however, requires some changes in the current systems;(1) when origin prefecture imposes local VAT on the 'final sales' rather than the 'central VAT liability', even if each prefecture levies the tax at variable rates, calculating tax under the input tax credit mechanism leads to an appropriate outcome; (2) our new allocation formula on the basis of 'revenue potentials' allows local governments to set their tax rate independently. In addition, we argue that in the view of exactness, Harmonized Sales Tax in Canada that derived consumption statistics from inter-regional Input-Output table is ideal for allocating tax revenue to the destination region. Until inter-regional input-output table will be designated by the government, some feasible reform package should be adopted: (1) deduction exempt final sales from designated statistics; (2) removal of employees' share; (3) increase in the weight assigned to population share and decrease in the weight assigned to designated statistics.
    Date: 2007–08
  4. By: Nobuki Mochida (Faculty of Economics, University of Tokyo)
    Abstract: The Local Allocation Tax (LAT) plays important role in fiscal equalization in Japan. The purpose of this paper is twofold: reviewing the key themes and issues of the LAT; and considering package of reforms designed to revitalize Japan's fiscal equalization program and to establish a sustainable basis for the future. We argue that the addressing expenditure needs in equalization should be retained, to do so will require improvement in the way of addressing expenditure needs. In addition, The LAT formula should be redesigned so as to encourage local government to deliver services in the most cost-effective manner. First, it should be based more systematically on objective criteria (e.g. size of school age population, remoteness indices) rather than actual endowment, such as public infrastructure. Second, the reliance on discretionary elements, including special LAT and various aspects of modification coefficient used in the LAT calculation, should be reduced and, in general, the formula made more transparent.
    Date: 2007–08
  5. By: David de la Croix (CORE, Catholic University of Louvain); Matthias Doepke (University of California, Los Angeles, CEPR, NBER and IZA)
    Abstract: The governments of nearly all countries are major providers of primary and secondary education to their citizens. In some countries, however, public schools coexist with private schools, while in others the government is the sole provider of education. In this study, we ask why different societies make different choices regarding the mix of private and public schooling. We develop a theory which integrates private education and fertility decisions with voting on public schooling expenditures. In a given political environment, high income inequality leads to more private education, as rich people opt out of the public system. More private education, in turn, results in an improved quality of public education, because public spending can be concentrated on fewer students. Comparing across political systems, we find that concentration of political power can lead to multiple equilibria in the determination of public education spending. The main predictions of the theory are consistent with state-level and micro data from the United States as well as cross-country evidence from the PISA study.
    Keywords: public education, private education, voting, democracy
    JEL: D72 I21 H42 O10
    Date: 2007–08
  6. By: Olivier Bargain (University College Dublin, CHILD and IZA); Leszek Morawski (University of Warsaw); Michal Myck (DIW Berlin, IFS and IZA); Mieczyslaw Socha (University of Warsaw)
    Abstract: The Polish tax and benefit system is presented in the context of a recently developed microsimulation model, SIMPL. The model allows simulating direct taxes, social contributions and public benefits in Poland for the years 2003 and 2005. It is based on the Household Budgets Survey data (Badania Budzetów Gospodarstw Domowych) from 2003 and 2005. The document describes details of the Polish tax and benefit system and the simulation assumptions which were necessary in modelling it in SIMPL. We provide information on the quality of the data used in the model and some details of the validation process through various robustness checks. Finally we provide examples of application of the model for analysis of effects of policy reforms.
    Keywords: microsimulation, tax and benefit systems, income distribution, Poland
    JEL: H24 H31 I32 I38
    Date: 2007–08
  7. By: Tenhofen, Jörn; Wolff, Guntram B.
    Abstract: How does private consumption react to an exogenous increase in government expenditure? Standard structural vector autoregressions (SVARs) usually report a positive GDP as well as consumption response, while event studies report a negative consumption response. We investigate in a SVAR whether anticipation of the fiscal shock reverses the sign of this dynamic response to a negative one. As a methodological contribution, we model expectation formation within a SVAR framework. We show for the US that consumption falls in reaction to an expenditure shock once the model allows for one-period-ahead anticipation of this shock. Modelling anticipation of fiscal shocks is thus crucial to correctly capture their macroeconomic effects. Differences in results between event studies and VARs can be explained by missing anticipation in VARs. When re-estimating the two models (with and without anticipation) for non-defense related expenditures, we find a positive consumption response for both models. The implications of our results for macroeconomic theory are briefly discussed.
    Keywords: Fiscal policy, government spending, net revenue, policy anticipation, structural vector autoregression
    JEL: E62 H30
    Date: 2007
  8. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Martin B. Schmidt (Department of Economics, College of William and Mary)
    Abstract: In this paper we address empirically the issue of the possible structural breaks in the public infrastructure investment series with the objective of identifying the existence and determining the timing of such breaks. Both heuristic and more formal tests suggest that a break in the mean of public investment occurred in the late 1970s or early 1980s. This is true for public infrastructure investment at the aggregate level as well as for most types of public infrastructures. We regard this evidence as the first step in the process of revisiting the analysis of the effects of such infrastructure investments in a VAR approach accounting for the presence of structural breaks.
    Keywords: public investment, infrastructure, structural breaks, VAR modeling
    JEL: C32 E62 H54
    Date: 2007–08–24
  9. By: MAHENC Philippe (LERNA, University of Toulouse); ;
    Date: 2006–08
  10. By: Bonnie Wilson (Department of Economics, Saint Louis University); Dennis Coates (Department of Economics, University of Maryland Baltimore County); Jac Heckelman (Department of Economics, Wake Forest University)
    Abstract: It is widely recognized that interest groups affect both microeconomic and macroeconomic outcomes. However, few researchers have attempted to discern empirically the factors that contribute to interest group activity. This paper provides a test of several theories of group formation in a panel setting. A nation’s stability, socioeconomic development, political system, size, and diversity all appear to contribute to interest group formation, as predicted by theory.
    Keywords: special interest groups, institutional sclerosis, stock returns, volatility
    JEL: D7 G1 G2 L5 O16
    Date: 2007–06
  11. By: Terry McKinley (International Poverty Centre)
    Keywords: Tax; Reforms; MDGs; Financing; Poverty
    Date: 2007–09
  12. By: Jonathan Levin; Steven Tadelis
    Abstract: Local governments can provide services with their own employees or by contracting with private or public sector providers. We develop a model of this "make-or-buy" choice that highlights the trade-off between productive efficiency and the costs of contract administration. We construct a dataset of service provision choices by U.S. cities and identify a range of service and city characteristics as significant determinants of contracting decisions. Our analysis suggests an important role for economic efficiency concerns, as well as politics, in contracting for government services.
    JEL: D23 D73 H11 L33
    Date: 2007–08

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